Intro
Recently on July 11, 2017, the California Court of Appeals, First District, Fourth Division, issued its ruling in the matter of Energy Insurance Mutual Limited (“EIM”), v. Ace American Insurance Company (“ACE”), Case No. A140656, in which the court found that general liability coverage was excluded from a claim of damage due to a massive gas explosion. In coming to that conclusion, the Court considered a broad interpretation of the term “professional services” in the exclusion of the General Liability Policy issued by ACE. Note, this is not a published opinion but we review the matter for its legal analysis and citation of cases in support, which are published opinions (See our post 3 Reasons to Review Unpublished Opinions). We also review the importance of carrying both professional liability and general liability in certain instances particularly in large construction projects.
Insurance Coverage Issue
Facts of the Underlying Case.
This case arises out of a tragic event resulting from a failure to identify and mark gas lines on a construction site. On November 9, 2004, an excavator operated by Mountain Cascade, Inc. (MCI), who working a project in Walnut Creek, California, punctured a high-pressured petroleum line owned by Kinder Morgan. Gasoline was released into the pipe trench and was ignited by the welding activities of Matamoros Pipelines, Inc., a subcontractor working for MCI. The resulting explosion and fire killed five employees and seriously injured four others. Extensive property damage also occurred. A Cal/OSHA investigation concluded that the failure to determine and mark the location of the utility line contributed to the accident.
The underlying lawsuits largely alleged that the pipeline rupture was caused by the negligence of the parties, including Kinder Morgan and Comforce who sought insurance coverage from its Excess carrier EIM and from ACE who carried a general liability and excess coverage. Ace defended under a reservation of rights and thereafter declined coverage. EIM commenced the instant action against ACE on March 16, 2011, seeking full reimbursement of the payments it made to Kinder Morgan under its excess policy, up to the full $25 million limit of Comforce’s umbrella policy with ACE. EIM further alleged that the defense costs and settlement payments disbursed in connection with the underlying lawsuits should have been paid by ACE. At issue on appeal, is whether the trial court properly determined that the tort claims asserted against Kinder Morgan arose from performance or non-performance of services of a professional nature.
It was determined that the pipeline was never properly identified and the contract called out an obligation to do so. The Court in this instance was persuaded that the failure to identify and mark gas lines was part of defendant’s “professional services.” The policy did not provide a definition for “professional services” so the court was at liberty to use the commonly known meaning of that term given that it is a term widely used in insurance. In doing so the court noted. “Courts have applied the professional services exclusion broadly to bar coverage for damages resulting from a wide range of professional services that extend “beyond those traditionally considered ‘professions, ‘ such as medicine, law, or engineering.” (Hollingsworth v. Commercial Union Ins. Co. (1989) 208 Cal.App.3d 800, 806-807 (Hollingsworth) [store employee negligently pierced customer’s ears]” Here, the court believed that the general contractor would be using special acquired skill in its oversight of the other contractors such that those activities fell within the broad rubric of professional services. Thus, Ace was relieved of responsibility as the General liability policy specifically excluded damage arising from such professional responsibility. The insured did not have an E&O policy with ACE.
Court’s Analysis
So, the lessons learned here are to make sure that the work involved in any project, which is either taken on and/or assumed by the insured, or directly required by contract, must be considered as potentially involving professional services. This is unusual in an industry like construction that is predominately covered by general liability for damages that flow from the negligence of those performing the construction work. Usually such work is covered by a CGL, but whenever there is oversight of other contractors, or others are taking action as a result of the opinion of another professional or management. Such activities should set of bells and whistles that an E&O policy should be procured in addition to the CGL policy.
One could argue that part of the excavation would include how to safely dig, which means the subcontractor must know and understand what they are digging in. That would seem to include identification of utility lines, which would inherently be part of excavation work itself and not require an extra special skill of knowledge. Those running a bull dozer would not need special skill to inquire about what they are digging into. It would seem that question would arise numerous times a day for those in the excavation business and if not, that would be negligent on the part of excavator in performing excavation services. However, the Court did not accept such an argument and pinned the responsibility on those who owned the gas line and managed the project.
As such, the court has put the onus on the general contractor to make such a determination and those activities are professional services as they are not necessarily doing the digging but rendering an opinion as to where to dig. This case also shows how the difference between professional liability and general liability is not a bright line. Given the vast authority provided in this case for a broad definition of professional services it would be prudent to purchase E&O out of an abundance of caution if the issue of prefessional services is even questioned.
Manuscripted Exclusion as a Precaution
It is noted, that one other safeguard would be to properly or narrowly define the term “professional services” in the general liability exclusion form. Certainly, the insured can define such terms and insist on a certain term through a manuscripted exclusion form. By defining the term, the court is not at liberty to apply the broad common law interpretation but must look to the language of the contract itself. However, don’t try this at home… get an attorney to draft such language, and beware that even through careful wording, there are so many types of activities taken on by many large projects that, it would be best to have E&O to cover that which would still fall within a narrowly worded exclusion.
Conclusion
As usual if the insured is going to the extent of obtaining coverage, it only makes reasonable sense to be fully insured and having both professional responsibility and general liability would be the prudent choice. Very few cases arise where the litigant is over insured. Err on the side of coverage. Don’t go cheap.
Author: Kevin Callon Boyle is a Coverage Attorney in Calabasas, California who has litigated all types of business matters with an emphasis on employment law. He also, is a licensed insurance producer and provides risk management services for his clients. The Law Offices of Kevin C. Boyle provides coverage opinions and counsel’s business clients and carriers as to coverage issues. Call for a free consultation at (818) 591-1755.